For Bitcoin investors, more guidance needed from IRS

Many of our readers have probably heard of Bitcoin and other forms of cryptocurrency such as Litecoin and Ethereum. For those who haven't heard of it, Bitcoin is a form of digital payment system in which transactions take place directly between users of the currency. Bitcoin is currently a very popular investment, currently boasting a 353 percent year-to-date return.

While those who have been investing in Bitcoin in the last handful of years have received a good return on their investment, tax authorities are well aware that many individuals are failing to report their Bitcoin profits as income. In fact, some experts estimate that the IRS may be looking to collect several billions of dollars in back taxes, as well as interest and penalties, from those who failed to report Bitcoin income, though others feel the problem is not so extensive.

There are a couple reasons why Bitcoin investors may not be reporting income. First of all, users don't receive tax forms for Bitcoin, leading investors to believe they may not have to report. That isn't true, of course. All income must be reported. A second reason for failing to report Bitcoin users may believe they cannot be identified by authorities because their identity is concealed in Bitcoin transactions. This isn't completely true, though. While users' real identities are not displayed in transactions, authorities can still use forensic analysis to identify users through their transactions.

A third reason for the failure to report is that Bitcoin is still relatively unregulated. The IRS considers virtual currency to be property rather than true currency or securities, and this allows users to avoid rules pertaining to securities and to take advantage of tax benefits applying to property. The IRS has yet to offer Bitcoin users guidance.

Those who own Bitcoin or other forms of cryptocurrency can and should consult an experienced attorney to address the payment of back taxes associated with Bitcoin. Those who are considering or who are considering investing in Bitcoin can also work with an experienced attorney to determine in advance their obligations to the IRS in terms of reporting income and losses. Being proactive can help ensure one doesn't end up in a spot down the road where the IRS catches one by surprise.

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